How we use options here

There are many ways to use options but for now, we focus on simple calls and puts and we are buyers of premium.

For short-term swing trades, we use slightly-out-of-the-money options (delta 50-30) with 2 to 9 days until expiration. For example, if I like a long setup in a stock trading near 180, I might buy this or next week’s 182.50 or $185 or $190 calls depending on how much leverage I want.

For position trades that are longer-term in their nature, we use out-of-the-money options (delta 40-20) with one to three months until expiration. For example, if I like a position setup in stock trading near $80, I might buy a few $85 or $90 or even $100 call options that expire 4 to 12 weeks from now.

We use calls or puts for select swing and position trades that can last anywhere from a few days to a few weeks. The goal is to capture a sizable move that is multiple times bigger than our initial risk. If you don’t feel comfortable with options yet, you can use the underlying stock for any of the options ideas mentioned here.

Options are risky and they are not for everyone’s portfolio. The number one rule with all options ideas I share here is that we assume that we risk the entire premium. Stop losses don’t work with many options because the market is often not liquid enough. This means that the main way to manage risk is via position sizing and proper timing.

Let’s assume you work with a 100k and you risk 1% of your capital per option idea.

1% of 100k is 1k. If the option you want to buy is worth 2.00, you can afford up to 5 contracts.

As a general rule of thumb, it makes sense to sell 1/2 our your contracts when you are up 100% on your options trade and let the rest ride either until our target is reached, they pull back to break-even, or they are about to expire.

Example: We buy five call options at $2 and a target of 8. Our risk is the entire premium.

If the calls go to $4, you can sell two of them. Then, raise your stop top break-even, which in this case is $2 and let the rest ride until our target in the underlying stock is reached or until it approaches its expiration date.

For some decent introduction to options, you can read my book: Swing Trading with Options.